Divorcing Bitcoin From Blockchain

At this year’s Buy-Side Technology North American Summit, panelists discussed the potential of blockchain technology. Anthony says that first, we need to make clear that bitcoin and blockchain are being used interchangeably.

“Bitcoin is the currency of DDoS attackers and other miscreants; blockchain has some capability.” This was the sentiment of Mike McGovern, CIO at Brown Brothers Harriman, who was speaking on a panel at this year’s Buy-Side Technology North American Summit.

While McGovern was making a joke to punctuate a point, there’s also an underlying truth there: Bitcoin, as a currency, is useful as an exchange-traded product and store of value, but the blockchain ledger is what has the most potential to revolutionize how financial-services firms transact. It’s important to remember that they’re two separate things, because right now these two things are at times incorrectly used interchangeably.

“Everyone is looking at blockchain,” McGovern said. “We’re looking at it. We’ve set aside some funds in our 2016 innovation budget around RD and working with colleagues on the buy side to think about how it can be applied.”

John Shea, CIO at Eaton Vance, echoed McGovern’s sentiments, and compared the evolution of the blockchain to that of the cloud.

“What’s funny about the blockchain is that it’s like what the cloud was years ago: everyone is talking about the cloud and no one really knew what the cloud was, but they’re talking about it,” he said. “You have to disconnect bitcoin from blockchain ─ blockchain’s the ledger; bitcoin’s the money.”

At its core, blockchain is an append-only database where you write once, erase never, Shea said. It’s a distributed, encrypted database with the foundation being transactions or virtual currency.

Even still, right now firms are playing a game of wait-and-see.

“There’s a ton of possibilities here, but it’s not at the ‘hey, we want to use this thing right now’ stage,” he said, with settlement being the most logical place for blockchain adoption.

Trust Still at Issue?

The other area that Shea saw the most potential was for cybersecurity.

“I think that there’s going to be a big drive towards blockchain just from a cybersecurity perspective. You can’t trust an email; wire fraud continues to increase. Blockchain is one possible technology that can help combat some of our challenges with wire fraud and cybersecurity. But it’s something that the industry has to adopt,” before his firm would jump fully onboard with blockchain solutions, he said.

McGovern noted that blockchain’s anonymity, at this point, will also give firms pause when it comes to adoption.

“I do think it will have an impact longer term, but at its heart, what I see is essentially replacing the centralized ledger provided by a trusted party with another type of ledger, and the anonymity that’s built into the technology is unattractive for institutional organizations,” the CIO said. “The most viable models I’ve seen are where organizations are embracing the technology but incorporating around it traditional trust banking, regulated entity kind of business model,” where the same legal and regulatory framework that operate today are still in place.

I’ve written this before, but exact definitions and terms matter especially when discussing a subject that is opaque.

When talking about the potential of something, clarity matters. So to start, let’s make sure that we’re using the terms bitcoin and blockchain correctly.

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